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Contracting For Irreparable Harm May Not Be As Effective As You Think

In the widely-watched case of Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254-2012 (Del. July 10, 2012), the Supreme Court of Delaware upheld the Chancery Court's ruling that temporarily enjoined Martin Marietta from engaging in a hostile takeover of Vulcan. The Chancery and Supreme Courts' opinions have rightfully garnered significant attention in corporate and legal circles. However, one aspect of the opinions that has been largely overlooked highlights an underappreciated distinction between Delaware and federal law involving the movant's burden in seeking injunctive relief for breaches of contract.

Before issuing a temporary restraining order (“TRO”) or preliminary injunction, Delaware state courts and all federal courts require a movant to demonstrate that it will suffer “irreparable harm” if the court does not issue an injunction pending trial. To account for this requirement and add predictability in the event of a breach, it has become increasingly common for contracting parties to include a clause stating that a breach of the underlying agreement will cause irreparable harm. However, depending on the chosen forum, such “irreparable harm clauses” can be either extremely helpful or of little use at all in securing a TRO or preliminary injunction.

As indicated by Chancellor Strine and Justice Jacobs in their respective Martin Marietta opinions, Delaware courts essentially view irreparable harm clauses as binding admissions that are sufficient, standing alone, to meet the irreparable harm requirement. Federal courts, however, afford such clauses little, if any, weight and evaluate the evidence presented by the parties to independently determine whether irreparable harm will befall the movant if the court does not issue an injunction. This disparate treatment of irreparable harm clauses has wide-ranging implications for contract drafters, parties to agreements, and litigators seeking to enforce various types of agreements.

The Legal Framework for Temporary or Preliminary Injunctive Relief

Although a breach of contract claim is governed by state substantive law, federal courts apply federal law in determining whether to issue a TRO and preliminary injunction.1 In addition to demonstrating that they are likely to suffer irreparable harm in the absence of preliminary relief, movants seeking TROs or preliminary injunctions must demonstrate that they are likely to succeed on the merits, that the balance of equities tips in their favor, and that an injunction is in the public interest.2 A movant's failure to persuade the court that all factors weigh in its favor will result in the denial of the motion.3 However, “[a] showing of irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction.” 4

To satisfy the irreparable harm requirement, a movant must demonstrate that without a TRO and preliminary injunction, it will suffer actual and imminent injury that cannot be remedied if the court waits until the end of trial.5It follows that absent exceptional circumstances, economic loss does not constitute irreparable harm.6

The standards in Delaware state courts for a TRO or preliminary injunction are similar to those applied in federal courts. The movant must establish a reasonable probability of success on the merits, a reasonable likelihood that it will suffer irreparable harm absent the injunction, and that the harm to the moving party if relief is denied outweighs the harm to the non-moving party if the injunction is granted.7And as with federal courts, Delaware courts have long-recognized that “[t]he quintessential guidepost for the availability [for injunctive relief, such as] specific performance … is inadequacy of the remedy at law.” 8

Irreparable Harm Clauses

Based on the necessity of demonstrating irreparable harm in what often is a very short time frame, and in light of the importance of the harm prong to the analysis, parties to various types of agreements often include an irreparable harm clause. Such clauses vary in form and scope. They may specify that a breach of the agreement will result in “irreparable harm,” or more subtly state that money damages would not be a sufficient remedy for a breach. Some more ambitious clauses assert that the breach of any term of the agreement will result in irreparable harm, whereas others are limited to breaches of provisions that are more susceptible to injunctive remedies, such as confidentiality, non-compete, non-disparagement, or non-solicitation clauses.

Regardless of the exact wording, the clauses all seek to ensure that the victim of a breach can successfully seek injunctive relief. However, depending on the forum in which the parties litigate the dispute, an irreparable harm clause may do little to help the movant convince the court that an injunction is warranted. Consequently, contract drafters, parties to agreements containing irreparable harm clauses, and litigators seeking injunctive relief must be aware of the disparate treatment courts afford such clauses.

Delaware's Approach to Irreparable Harm Clauses

Martin Marietta is illustrative of Delaware's approach to irreparable harm clauses. As Martin Marietta and Vulcan began exploring a merger in 2010, the companies executed a non-disclosure agreement (“NDA”) and a joint defense and confidentiality agreement (“JDA”). The agreements were designed to protect the sensitive information the companies exchanged pursuant to merger discussions. The NDA stated that “money damages would not be [a] sufficient remedy for any breach … by either party [and that] the non-breaching party shall be entitled to equitable relief.” 9 The JDA “obligate[d] the parties to pursue equitable or injunctive relief—and not monetary damages—in the event of a breach of that agreement.” 10

As merger negotiations continued, Vulcan's stock price decreased significantly relative to Martin Marietta's. Out of concern that its stock was undervalued, Vulcan declined to move forward with the merger. Martin Marietta, however, saw an opportunity to leverage its more valuable stock and decided to launch a hostile exchange offer and proxy contest in the lead up to Vulcan's annual meeting. In so doing, Martin Marietta used and disclosed Vulcan's non-public information covered by the NDA and JDA.

Martin Marietta argued on appeal that Chancellor Strine erred in enjoining its takeover bid because, despite the irreparable harm clause in the NDA and the injunction clause in the JDA, there was no evidence that Vulcan was threatened with or actually suffered irreparable harm. The Supreme Court rejected this argument on legal and factual grounds. As a factual matter, the court observed that Chancellor Strine found that Martin Marietta's violations of the NDA and JDA and its continued use of Vulcan's confidential information to take over the company would cause irreparable harm.

The court also held that Martin Marietta's argument was legally flawed. Pointing to the irreparable harm clause in the NDA and injunction clause in the JDA, the Court observed that Delaware courts “have long held that contractual stipulations as to irreparable harm alone suffice to establish that element for the purpose of issuing … injunctive relief.” 11 Viewing the irreparable harm clause as a stipulation, the court held that Martin Marietta could not breach the NDA and then prevail on an argument—contrary to what it had stipulated—that irreparable harm would not result from its breach of the agreement. As the Supreme Court's quoted language indicates, when faced with irreparable harm clauses, Delaware courts have consistently bound the parties to those agreements.12

The Federal Court Approach to Irreparable Harm Clauses

Unlike in Delaware state court, and contrary to what parties likely expect, the presence of an irreparable harm clause does not compel a federal judge to find that denying the motion for a TRO or preliminary injunction will result in irreparable harm. Instead, federal judges, in exercising their discretion to determine whether equitable relief is warranted, generally give such clauses little weight. Consequently, despite the presence of an irreparable harm clause, a movant must provide sufficient evidentiary support to meet its burden of persuasion that it will suffer irreparable harm if the court does not grant preliminary relief.

As in Riverside Publishing Co. v. Mercer Publishing LLC, No. 11-1249 (W.D. Wash. Aug. 4, 2011), the independent determination that federal judges make can result in the denial of injunctive relief, despite the presence of an irreparable harm clause. In that case, the movant, Riverside, published a standardized test designed to identify gifted students. Mercer, the respondent, published books and online materials for parents to help their children prepare for the test. Riverside claimed that Mercer's practice questions were too similar to questions on the actual test and sued Mercer for copyright infringement. The parties resolved that dispute through a settlement agreement, which contained an irreparable harm clause.

Riverside subsequently announced that it was preparing a new version of the test. In response, Mercer composed new practice questions and exams to help prepare students for the revised test. Claiming that Mercer's actions violated the settlement agreement, Riverside filed suit and sought to enjoin Mercer from releasing its practice questions and exams.

Understandably, Riverside pointed to the settlement agreement's irreparable harm clause to argue that, absent injunctive relief, Mercer's purported breach would cause irreparable harm. The court disagreed. It first recognized that circuit and district courts have declined to presume irreparable harm based on a contract clause. Pointing to the Supreme Court's emphasis in Winter v. Natural Resources Defense Council that movants demonstrate actual harm, the court “querie[d] whether it can give any weight to such a clause.” 13 “At best,” the court concluded, “the clause is evidence that at the time of the Settlement Agreement, the parties predicted that breaches of [certain terms of the Agreement] would be the sort that would cause irreparable harm.” 14 Although “[t]hat prediction is perhaps entitled to some weight,” the court held that the clause did “not relieve Riverside of its obligation to demonstrate irreparable harm.” 15 Turning to the other facts presented, the court found that Riverside's evidence of irreparable harm was “meager” and held that Riverside did not demonstrate that it would suffer irreparable harm if Mercer was not enjoined from publishing its practice questions and exams.16

Key Takeaway Points

Based on a broad review of relevant case law, some key points can be gleaned:

Parties to agreements must be aware of the fact that an irreparable harm clause does not guarantee that a court will find irreparable harm in the event of a breach. This is especially true in federal court.

Contract drafters may consider limiting the scope of the irreparable harm clause to subject matters typically reserved for injunctive relief. The “little weight” given to such clauses may turn into “no weight” if the clause appears to be inartfully-drafted boilerplate.

In certain situations, contract drafters may also consider harmonizing forum selection clauses with their expectations regarding preliminary injunctive relief in the event of a breach.

Federal courts will likely conduct a more searching inquiry into the facts of the case than Delaware courts to determine whether irreparable harm will result if preliminary relief is not granted. Litigators in federal court must plan accordingly to support their clients' motions, which should include proposed findings of fact.

If presented the option of seeking preliminary relief in Delaware state or federal court, the courts' disparate treatment of irreparable harm clauses should weigh into a litigator's decision on where to file.

Although some Delaware courts rely exclusively on irreparable harm clauses in their analysis, many look to the evidence of the harm presented as an independent basis to support a finding of irreparable harm. The prudent litigator seeking injunctive relief in Delaware state court will therefore still present evidence indicating that his or her client will suffer irreparable harm if the motion for a TRO and preliminary injunction is not granted, even if the contract in dispute contains an irreparable harm clause.

Stephen J. Shapiro is a partner in the Philadelphia office of Schnader Harrison Segal & Lewis LLP and co-chair of Schnader's Financial Services Litigation Practice Group. Mr. Shapiro can be reached at 215-751-2259 or sshapiro@schnader.com. Aaron J. Fickes is an associate in the Washington, D.C. office of Schnader Harrison Segal & Lewis LLP and a member of the Firm's Litigation Services Department. Mr. Fickes can be reached at 202-419-4228 or afickes@schnader.com.

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